We all have stayed at a hotel or Bed and Breakfast, and you may have heard about the service called Airbnb, where homeowners rent a room, or even their whole house, for short term rentals. Now there is a new kid on the block called Bud and Breakfast or the Airbnb of Weed. In areas where marijuana is legal, the Bud and Breakfast concept is a similar arrangement, but it is special because the accommodation allows the consumption of cannabis. Operating such an entity comes with its own set of tax and accounting complications.
Let’s start with the obvious: Is the Bud and Breakfast subject to 280E compliance? Well, that depends—if you provide the marijuana or have it available for guests to purchase from you, then you are subject to 280E rules. If you provide directions or even take your guests to a local dispensary where they make their own purchase, then you are not subject to 280E.
Accounting for a Bud and Breakfast is similar to accounting for any hotel—you must keep records of arrival dates, departure dates, amounts charged, and local taxes. Depending on the city you are in, you could be subject to a local lodging tax as well as sales tax. Both must be tracked and remitted to the proper taxing authority. Normally, the taxes are collected monthly, but it may be quarterly or even yearly if only a small number of people stay in the facility. It depends on the jurisdiction.
The complication comes with income taxes, because there are three possibilities for taxing. The IRS’s vacation home regulations, short-term rental regulations, and long-term rental regulations must all be considered.
Let’s start with vacation homes. These regulations can apply to a second home you rent out occasionally or rental of your primary residence. If you rent out your home for 14 days or less in a year, then you do not have to pay taxes on the income received. You also don’t get to deduct any expenses other than the ones you normally can deduct on your taxes, such as mortgage interest or property taxes. Don’t believe that the government would not tax some forms of income—look up IRS publication 527, which lists all the regulations regarding rentals, including this one. This type of rental can be used to your best advantage if you live in a town that has a big event. It is very popular for some events such as the Daytona 500 or Kentucky Derby, where people rent out their house while they escape the crowds. Often they can make enough to pay several months of mortgage payments while they go on a quiet vacation. The key here is the 14 days. If you go over by just one day, the income (all of it—not just the extra day over 14) becomes taxable.
Short-term rentals are taxed the same as any business and must be reported on a Schedule C, unless they are set up a business entity such as an LLC or corporation. To qualify, each renter must stay less than 14 days at any one time; but, unlike with a vacation home, you have several renters, so the property can be rented for more than a total of 14 days in the year. This would be a normal Bud and Breakfast situation.
Long-term rentals are where you rent out your place for longer than 14 days to any one person. That means if someone stays for a month or more, you are in the long-term category. However, if one person happens to stay for three weeks, but all the rest are still under the 14-day limit, you can still qualify as a short-term rental as long as you did not intend to have long-term rentals. The income and expenses are reported on Schedule E and have some other implications, such as being classified as passive income. When income is passive, your losses are limited based on your income. That means that high-income landlords may not be able to use those losses in the current year.
One other situation to take into consideration is when the entire house is not rented out. Most of the time a Bud and Breakfast is similar to a Bed and Breakfast—the owner lives there and rents out extra bedrooms. In this case, in addition to deciding the tax treatment, you must also allocate expenses based on the percentage of the square footage that is used for guests, as opposed to the space you use. This also applies if you own a duplex and you live in one side and rent out the other. You can only take the expenses up to the amount of income—meaning that you cannot have a loss on a property you also live in.
This allocation of expenses also applies if you don’t stay when guests are there but live there the rest of the year. An example is a house in a prime vacation area such as Jackson Hole, Wyoming, or Estes Park, Colorado, that is rented out during the summer when rental rates are high, but you live there the rest of the year. In this case, you apply the percentages of expenses you can take based on time spent renting it out, instead of based on square footage.
Keep in mind that these regulations can also apply to renting out an RV or even a fishing cabin. The bottom line is that, as with any tax situation, several things need to be considered before you rent out your home. Make sure you consult with a tax preparer first, to ensure that you are getting the best tax treatment possible for your situation.
For the flip side of this: How to determine whether you can take a trip as a business deduction or not, and how to track your trip expenses, you’ll want to attend our free webinar to be held on December 1, 2017. Go to www.eventbrite.com/e/entertainment-expenses-solid-rock-boot-camp-webinar-series-registration-38828503098 to register. In the meantime, if you have any questions or concerns about your tax situation go to our website and click on Schedule an Appointment to set up a consultation call.
Cynthia L. Finkenbinder, CPA, is the owner of Alpha Omega Accounting, LLC, in Northern Colorado. With clients in 26 states and five countries, she is an expert in 280E compliance, accounting and multi-state taxes. Feel free to contact her if you have any questions or would like us to address your question, or are in need of her professional services, at firstname.lastname@example.org or visit her website: http://alphaomega-acct.biz and follow her on Facebook at www.facebook.com/Alpha.Omega.Accounting.LLC/.